United States General Accounting Office Washington, DC 20548

1 GAO-02-1101R Interim Report on Internet Gambling

September 23, 2002

The Honorable Michael G. OxleyChairmanCommittee on Financial ServicesThe Honorable John J. LaFalceRanking Minority MemberCommittee on Financial Services

The Honorable Spencer BachusChairmanSubcommittee on Financial Institutions and Consumer CreditCommittee on Financial Services

The Honorable Sue W. KellyChairwomanSubcommittee on Oversight and InvestigationCommittee on Financial Services

House of Representatives

Subject: Interim Report on Internet Gambling

As you requested, we are conducting a study on Internet gambling and the U.S.payments system, specifically the use of credit cards to fund Internet gamblingactivities. This letter responds to your request for an interim product thatsummarizes results to date based on this study. As agreed with your office, weplan to issue a final report on our work in November 2002.

In your letter dated September 10, 2002, you noted plans to bring H.R.556, theUnlawful Internet Gambling Funding Prohibition Act, to the House floor fordebate later this month. Thus, you asked us to provide this interim product toaddress four key issues for consideration in the congressional debate. We areproviding information on gambling laws of selected states and the principalfederal statutes that pertain to Internet gambling and courts’ interpretations ofthose statutes; and preliminary results on the structure of the credit card industry,the policies and procedures that industry participants have implemented relatingto the use of credit cards to fund Internet gambling transactions, and the views oflaw enforcement and industry participants on the vulnerability of the Internetgambling industry to money laundering. These and other questions you asked willbe answered more fully in a final report to be issued in November 2002.

United States General Accounting Office

Washington, DC 20548


To address the legal issues, we researched federal laws; the laws of fivejudgmentally selected states whose statutes included a wide-range of gamblingprovisions; case histories; and related studies. We also spoke withrepresentatives of the Department of Justice (DOJ) and the offices of theattorneys general for the same five states. To obtain information on the creditcard industry’s efforts to deal with Internet gambling, we interviewed officials ofthe four major credit card organizations, some large issuing and acquiringmember banks, third-party processors, and a few banking trade associations. Wealso interviewed gaming industry and Internet gambling industry experts,knowledgeable state representatives, and law enforcement officials to obtain theirviews on the susceptibility of Internet gambling to money laundering and on someof the legal issues pertaining to on-line gaming and betting.

The information on the credit card industry’s policies and procedures related toInternet gambling addressed in this letter focus primarily on those implemented inthe United States and are based almost exclusively on statements that we couldnot, and did not, verify or corroborate. Internet gambling–related policies andprocedures applicable to the international members or partners of the variouscredit card entities will be discussed further in the final report. We performed ourwork between March 2002 and September 2002 in accordance with generallyaccepted government auditing standards.

RESULTS

Currently, both state and federal laws apply to Internet gambling in the UnitedStates. In general, gambling legislation is a matter of state law and variesconsiderably among the states. Internet gambling typically occurs throughinterstate or international means, with a Web site located in one state or countryand the gambler in another. Federal law recognizes the wide variations amongstate laws and seeks to ensure that neither interstate nor foreign commerce isused to circumvent state statutes. To date, 18 U.S.C. § 1084, commonly referred toas the Wire Act, is the federal statute that has been used to prosecute federalInternet gambling cases. The act prohibits gambling businesses from usinginterstate or international wires to knowingly receive or send certain types of betsor information that would assist in placing bets. Although the Wire Act has beensuccessfully used to prosecute gambling businesses through the Internet, thestatute contains certain ambiguities that may limit its applicability—for example,uncertainty about whether its provisions apply to all types of betting or are limitedto sporting events and contests. The DOJ generally takes the view that the WireAct is not limited to sports-related gambling activities, but case law on this issue isconflicting.

Two types of credit card organizations handle the four major credit cards issuedin the United States. Credit card associations are owned by a large network ofmember financial institutions, which may approve credit card applications andissue credit cards, approve and sign up merchants to accept the cards, or both.The associations define the policies, roles, and responsibilities of their member


institutions and provide the computer systems that transfer transaction databetween member institutions and merchants. Full-service credit card companiesissue their own brands of cards directly to customers and authorize merchants toaccept those cards. Credit card associations and full-service companies havetaken different approaches to restricting the use of their cards for Internetgambling. Credit card associations have focused primarily on facilitating theblocking of Internet gambling transactions. Credit card companies have focusedprimarily on prohibiting Internet gambling sites from becoming credit cardmerchants.

Representatives of law enforcement agencies, regulatory bodies, and the creditcard and gaming industries expressed mixed views regarding the vulnerability ofInternet gambling to money laundering. Law enforcement officials believe thatInternet gambling can be a significant money-laundering vehicle because of thevolume, speed, and international reach of Internet transactions and the offshorelocations of Internet gambling sites. In their view, these characteristics canpromote a high level of anonymity and make investigations difficult. Banking andgaming regulatory officials did not view Internet gambling as particularlysusceptible to money laundering, especially when credit cards that create atransaction record and are subject to relatively low transaction limits are used forpayment. Industry gaming officials noted that increased blocking of credit cardtransactions for Internet gambling could help promote newer forms of electronicpayment methods that may be more susceptible to money laundering.

Internet Gambling Is Governed by Both State and Federal Law

Although both state and federal laws apply to gambling in the United States, whengambling takes place within one state, state law predominates. Each state haslaws that address whether individuals can legally gamble within its borders andwhether gaming businesses can exist within the state. States where gambling islegal regulate the type of gambling that is permissible and the conditions underwhich gambling businesses can function. Internet gambling is typically aninterstate or international matter, however, because the gambler and the Web siteare in two different states or even countries. Because gaming over the Internettypically goes through state or international communication lines, suchtransmissions can violate a number of state laws, although the states may neverknow that such transmissions occurred. Federal law recognizes the widevariations among the laws of the states and seeks to ensure that neither interstatenor foreign commerce is used to circumvent states’ choices. The Wire Act, forexample, has been used to prosecute Internet gambling activities when gamblinghas occurred over state lines.

A Survey of Five States Shows That State Laws Vary Widely

We reviewed the gambling laws of five states—Massachusetts, Nevada, NewJersey, New York, and Utah---to determine how they affect Internet gambling. Weselected those states because they offer a wide range of gambling provisions, from


total prohibition to legalized land-based casino gambling.1 In summary:

Massachusetts has legalized dog and horse racing under the supervision ofthe State Racing Commission and some statewide lotteries and raffles bycertain organizations under the supervision of the State Lottery. Althoughit prohibits most other types of gambling, including transmitting a bet orwager using the telephone, Massachusetts does not a have statutespecifically addressing Internet gambling.

Nevada has legalized land-based casino gambling and has authorized theNevada Gaming Commission to adopt regulations governing the licensingand operation of Internet gambling only when it determines that interactivegaming can be operated in compliance with all applicable laws. Until sucha determination is made, Internet gambling remains illegal in Nevada.

In New Jersey, gambling can be made legal only by referendum, and onlyland-based casino gambling in Atlantic City, licensed horse racing, statelotteries, bingo and raffles for certain groups, and amusement games havebeen approved via referendum. Thus, Internet gambling is illegal in NewJersey.

New York has authorized certain lotteries, certain types of pari-mutuelbetting on horse races, and bingo, lotto games and local games of chanceoperated under certain conditions but prohibits most other types ofgambling, such as Internet gambling.

Utah prohibits all forms of gambling, including state-run lotteries, and theAssistant Attorney General has stated that Utah believes that gamblingfrom a computer located in Utah would constitute gambling within thestate.

The attorneys general of New Jersey and New York have recently initiated actionsagainst Internet gambling entities or institutions facilitating gambling over theInternet. In June 2001, New Jersey’s Attorney General filed three separate civilcases against entities operating Internet gambling Web sites that accept wagersfor casino-style games, horse races, and sports games from individuals located inNew Jersey. These cases are still pending. In addition, in June 2002 New Jersey’sAttorney General settled two of seven civil lawsuits that were brought in October2001, in which the Attorney General sought to enjoin companies engaged inInternet gaming activities from accepting wagers on various sporting events fromindividuals or entities located in the state. Earlier, on March 18, 2002, a jointresolution was proposed in the state assembly for the formation of an Internet

1 In addition to the 5 states that we reviewed, we also researched the law of all 50 states todetermine if any had enacted specific legislation regarding Internet gambling. We found that fivestates (Illinois, Louisiana, Oregon, Nevada, and South Dakota) had enacted laws that specificallyprohibited aspects of Internet gambling.


Gaming Study Commission, which would conduct a comprehensive study of thesocial and economic impact of legalizing Internet gambling in New Jersey. Anofficial from the New Jersey Attorney General’s office advised us that thisresolution has not moved through the legislature. New York’s Attorney Generalrecently initiated two separate inquiries into the business practices of financialinstitutions regarding the possible facilitation of on-line gambling by New Yorkcitizens. Settlements in these two inquiries included an agreement by thebusinesses to discontinue any facilitation of on-line gambling activities in NewYork. Enclosure I includes additional details on the gambling laws of these fivestates.

The Federal Government Regulates Gambling That Affects Interstate orInternational Activity

Although gambling regulation is generally left to the states, the federalgovernment has the authority under the Commerce Clause of the Constitution toregulate gambling activity that affects interstate commerce.2 With Internetgambling, bets are generally placed at the computer of an individual in one stateand received at a server in either another state or another country. Three federalstatues appear to have direct applicability to on-line gambling: the Wire Act, theTravel Act,3 and the Illegal Gambling Business Act.4 To date, only the Wire Act hasbeen applied in the federal prosecution of activity relating to Internet gambling; itsprovisions are discussed below. These other federal gambling statutes have beenused in the closely analogous situation of telephone wagering, including telephonecalls to place wagers with offshore bookmakers. Enclosure II contains details onthe other two federal statutes that could apply to Internet gambling, plus theIndian Gaming Regulatory Act, which affects gaming on Native Americanreservations.

The Wire Act prohibits gambling businesses from knowingly receiving or sendingcertain types of bets or information that assists in placing bets over interstate andinternational wires. Thus, if an Internet gaming Web site operating in any country(including the United States) receives a bet transmitted by an individual located inthe United States, the operator has violated the Wire Act. Therefore, foreignentities offering gambling to U.S. citizens through the Internet would be subject tothe Wire Act because they are soliciting business from the United States. Althoughthere have been successful prosecutions under the Wire Act against gamblingbusinesses operating over the Internet, including prosecutions of foreign entities,courts do not agree on the applicability of certain sections of the statute.

First, the Wire Act mandates that a wire communication facility must be involvedin order for a violation to occur. Currently, all Internet communications are

2 U.S. Const., art. I, § 8, cl. 3 states in relevant part that “The Congress shall have Power ... [t]oregulate Commerce with foreign Nations, and among the several States, and with the IndianTribes.”3 18 U.S.C. § 1952.4 18 U.S.C. § 1955.


dependent in some way upon some type of wire communication, such astelephone or data lines. Depending upon how Internet technology develops,however, future Internet communications may no longer be wire communicationscovered under the Wire Act.

Second, individual courts have reached different conclusions about the types ofgambling to which the act applies. The statute prohibits the transmission of“information assisting in the placing of bets or wagers on any sporting event orcontest.” This language has led some courts to interpret the Wire Act as coveringbets only on contests that involve sports. For instance, in In re MasterCardInternational, 132 F. Supp. 2d 468 (E.D. La. 2001), the court held that a plainreading of the Wire Act “clearly requires that the object of the gambling be asporting event or contest.” However, other courts have applied the Wire Act tocasino-type gambling and not limited its application to sports betting. In Peoplev. World Interactive Gaming, 714 N.Y.S. 2d 844 (N.Y. Sup. Ct. 1999), a New Yorkcourt enjoined an Antiguan company from operating or offering casino gamblingover the Internet. The Wire Act was among the laws the court held were violated,although the gambling was casino-type gambling and not merely sports betting.Relying in part on the legislative history of the Wire Act, DOJ generally takes theview that the act is not limited to sports-related activities.

Third, the phrase “transmission of a wire communication” is somewhatambiguous. Depending on how the phrase is interpreted, the act might not applyto Internet gambling in some instances—for example, when information is onlyreceived over the Internet. Some courts have held that “transmission” meansreceiving as well as sending information, while others have held that it means onlysending.5 In Telephone News System v. Illinois Bell Telephone Co, 220 F. Supp.621 (N.D. Ill. 1963), aff’d, 376 U.S. 782 (1964), a case involving a number thatprovided recorded horse-racing information to anyone who called, the courtrejected the contention that the word “transmission” meant receiving as well assending. The court in this case held that a professional bookmaker who used thistelephone service to obtain horse racing-information for his bookmaking businessdid not violate the Wire Act, because the bookmaker did not send gamblinginformation over the Wire but merely received it. However, another court hasheld that receiving information alone is a violation of the act. In United States v.Reeder, 614 F. 2d 1179 (8th Cir. 1980), the court found violations of the Wire Actwhen a professional bookmaker located in Arkansas made calls to California andNew York sports information services that provided recorded game scores. Thecourt held that the Wire Act forbids the use of interstate facilities for receivingwagering information. Applying this interpretation to the Internet, receivingsports scores for use in the business of wagering could be a violation of the WireAct.

5 United States v. Reeder, 614 F.2d 1179 (8th Cir. 1980); United States v. Stonehouse, 452 F.2d 455

(7th Cir. 1971); Telephone News Sys. V. Illinois Bell Tel. Co, 220 F. Supp. 621 (N.D. Ill. 1963), aff'd,376 U.S. 782 (1964).


Finally, some confusion exists among the courts concerning the second paragraphof the Wire Act, 18 U.S.C. § 1084(b), which provides that “[n]othing in this sectionshall be construed to prevent the transmission . . . of information assisting in theplacing of bets or wagers on a sporting event or contest from a State or foreigncountry where betting on that sporting event or contest is legal into a State orforeign country in which such betting is legal.” In other words, transmittinginformation to assist in placing bets on a certain event is legal if two conditionsare met: “(1) betting on the same event is legal in both the place of origin and thedestination of the transmission;” and (2) the transmission is limited to informationthat assists in the placing of bets—that is, it does not include the bets themselves.6

However, certain courts have stated that this language means that when thebetting activity is legal in both jurisdictions, interstate gambling would not be aviolation of the Wire Act.7 Most courts disagree with this interpretation ofSection 1084(b), and based upon clear statements in the legislative history, DOJdisagrees with this interpretation of Section 1084(b) as well.8

Two Types Of Credit Card Organizations

Function In The U.S. Market

Two types of credit card organizations handle the four major U.S. credit cards: (1)credit card associations such as VISA International (VISA) and MasterCardInternational Incorporated (MasterCard) and (2) full-service credit cardcompanies such as American Express Company (American Express) and DiscoverFinancial Services, Inc. (Discover). Credit card associations and full-servicecredit card companies vary dramatically in size, market reach, and organizationalstructure. As of December 31, 2001, for example, the two major credit cardassociations had dramatically higher numbers of issued credit cards than themajor credit card companies (fig. 1).

6 United States v. Cohen, 260 F.3d 68, 73 (2d Cir. 2001). cert. denied, 122 S. Ct. 2587 (2002); UnitesStates v. Ross, 1999 WL 782749 (S.D.N.Y. 1999).7 United States v. Kaczowski, 114 F. Supp. 2d 143, 153 (W.D. N. Y. 2000); Missouri v. Coeur D’AleneTribe. 164 F.3d 1102, 1109 n.5 (8th Cir. 1999), cert. denied, 527 U.S. 1039 (1999).8 H.R. Rep. No. 87-967 at 3 (1961).


Figure 1: Total Number of Issued Credit Cards*

*Issued domestically as of December 31, 2001.

Source: The Nilson Report, Oxnard, California, Issues 756 (January 2002) and 760 (March 2002).

Credit Card Associations Set Policies, While Members Issue Cards and AcquireMerchants

Each of the two major associations in our review is owned by its memberfinancial institutions. Around 21,500 member financial institutions own VISA, andabout two-thirds of them are located in the United States. About 20,000 financialinstitutions participate in MasterCard worldwide. As described in a prior GAOreport, MasterCard has a two-tier membership structure composed of principalsand affiliates.9 Principal members have a direct membership relationship with theassociation, while an affiliate’s membership must be sponsored by a principalmember. For example, a U.S. or foreign bank can apply to become an affiliatemember if a principal member agrees to sponsor the bank and the bank satisfiesthe association’s membership criteria and approval process. MasterCard hasmore than 1,500 principal members that, in turn, have sponsored about 13,500affiliate members worldwide.

9 Money Laundering: Extent of Money Laundering through Credit Cards Is Unknown (GAO-02-670, July 22, 2002).

http://www.gao.gov/cgi-bin/getrpt?GAO-02-670

http://www.gao.gov/cgi-bin/getrpt?GAO-02-670


VISA is a private, nonstock, for-profit membership organization composed ofcompeting members. MasterCard, also a membership organization composed ofcompeting members, recently changed its corporate status by creating a stockholding company that substantially owns all the voting power and economic rightsin MasterCard. The principal members of MasterCard are also the shareholders ofthis new stock holding company. Both associations have boards of directors thatbroadly govern their policies and rules. Member financial institutions elect theVISA International Board, and members are assigned votes based upon their salesvolume. Similarly, MasterCard’s board is elected by the shareholders of the newstock holding company.

While the associations do not provide credit card services directly to cardholdersor businesses, they establish the operating standards that define the policies,roles, and responsibilities of their member institutions and provide the dataprocessing and telecommunications systems that transfer transaction databetween members. The member institutions issue the credit cards, sign upmerchants to accept credit cards, or both and provide other credit card–relatedservices directly to the cardholders and merchants. Member institutions fallprimarily into two categories:

Issuing banks that solicit potential customers, approve applications, andissue credit cards. These banks extend credit to cardholders, establishcardholders’ account terms (for example, credit limits and treatment ofdelinquent accounts), collect the debts, and maintain the accounts andrelated records on cardholders.

Acquiring banks that solicit potential merchants and approve and licensemerchants to accept credit cards. These banks, also known as merchantbanks, enter into agreements authorizing merchants to accept theassociation’s credit card, submit the card transactions of their merchantsinto the association’s system to obtain payment from issuing banks, andmaintain the accounts and related records on their merchant clients.

Full-Service Credit Card Companies Issue Cards and Acquire Merchants

The two full-service credit card companies in our review, American Expressand Discover, issue their own brand of cards directly to customers andauthorize merchants to accept those cards. Discover, an affiliate of MorganStanley and Co., primarily provides credit card services. American Express, apublicly held company, also provides travel, financial, and network services.Both companies are affiliated with a U.S. bank.

American Express and Discover assume primary responsibility for providingcredit card services directly to both customers and merchants. They performall major aspects of issuing cards, including approving applications fromcustomers, mailing cards to customers, authorizing transactions, and sendingout bills. They also perform all major aspects of acquiring merchants to accept


their cards, including signing up merchants, distributing credit card terminals,and settling merchant accounts. By acting as both the issuer and the acquirer,the two companies represent what is referred to in the industry as a “closedloop” system. Both companies also own and operate electronic networks forconducting credit card transactions that handle all information on transactionsfor cardholders and merchants alike.

American Express and Discover market their credit card business toconsumers and potential merchants in the United States. Both companies issuecards to individuals, and American Express also issues cards to businesses. Inaddition, American Express has arrangements in some overseas markets forlicensing foreign banks to issue its cards and acquire merchants. As ofDecember 31, 2001, American Express had arrangements with 74 institutionslocated in 77 countries other than the United States.

Associations and Full-Service Companies Take Different Approaches to

Restricting Internet Gambling

Credit card associations and credit card companies have taken differentapproaches to restricting the use of their cards for Internet gambling. Credit cardassociations have focused primarily on facilitating the blocking of Internetgambling transactions. Credit card companies have focused primarily onprohibiting Internet gambling sites from becoming credit card merchants.

Credit Card Associations and Their Members Focus on Blocking

Neither VISA nor MasterCard has issued policies to its members that restrict theuse of the association’s credit cards for Internet gambling. Instead, bothassociations have focused on developing procedures to block Internet gamblingtransactions. Officials from both associations explained that reaching aconsensus among the members on a blanket policy throughout the world wouldlikely be difficult. Some members, they noted, are located in countries whereInternet gambling is legal and, according to one official, represents an expandingbusiness market. Policy decisions to restrict the use of credit cards for Internetgambling are therefore left up to the discretion of individual member institutions.Association officials note, however, that their members agree with operatingregulations for both VISA and MasterCard stipulating that only legal transactionsmay be introduced into the systems.

VISA and MasterCard have each developed a system of coding that allowsmember banks to block Internet gambling transactions. Both associations havehad a long-standing uniform coding system designed to facilitate the processingand authorization of credit card payments for member banks. About 4 years ago,each association refined its system to include a cross-indexed scheme ofmerchant and commerce codes so that Internet gambling transactions could beidentified. Internet gambling merchants that accept VISA or MasterCardpayments must use a combination of a gaming merchant category code and an


electronic commerce indicator code. These two codes are transmitted throughthe credit card network to the card issuer as part of the requested authorizationmessage. They inform the card issuer that the transaction is an Internet gamblingtransaction and enable the issuer to deny authorization for such transactions.This refinement to the coding system enables member institutions to blockInternet gambling transactions.

Officials explained that the coding system informs the card issuers that thetransaction is an Internet gambling transaction but cannot tell the issuer whetherthe particular transaction is illegal or not. For example, a U.S. cardholder mayvisit a country where Internet gambling is legal and while there, use a credit cardto pay for on-line gambling transactions. If the credit card issuer has chosen toblock Internet gambling transactions and the transaction has been properlycoded, authorization for payment will be denied. Although the existing codingsystem does not capture enough information to distinguish between legal andillegal Internet gambling transactions, an official pointed out that the morefundamental reasons why such distinctions cannot be made are the legalcomplexities involved in determining which laws govern any particular Internettransaction and the practical limitations of determining where a cardholder mayactually be located when engaging in the transaction. As a result, policy decisionsto block Internet gambling transactions will likely affect legal Internet gamblingtransactions along with those that are illegal.

While the issuer is responsible for making the policy decision on whether or notto deny authorization for Internet gambling transactions, the actual blocking ofsuch transactions can occur at different points in the credit card transactionprocess. The credit card association, the issuer, or a third-party processor can dothe actual blocking (fig. 2).


Figure 2: How a Credit Card Transaction Can Be Blocked

Source: VISA and other credit card industry officials.

Information on the number of issuing member banks that have opted tosystematically block Internet gambling transactions is not readily available, butassociation officials noted that many of the largest U.S. credit card issuers havechosen to follow this course of action. Initial contacts with the eight issuingbanks we reviewed, which represent more than 80 percent of the purchasevolume of cards issued by VISA and MasterCard, indicated that all eight hadimplemented policies to deny payment authorization for Internet gamblingtransactions. Officials of a key trade association for community banks and theprocessor of its members’ credit card transactions stated that most, if not all, of


the small community bank issuers have also chosen to block Internet gamblingtransactions. Issuing banks explained that they are blocking Internet gamblingtransactions primarily because of on-line gambling’s unclear legal status and thefinancial impact (for example, potential legal costs and charge-offs10) that canresult from customers refusing to pay their gambling charges.

Bank issuers’ efforts to block Internet gambling transactions have, according toresearch conducted by a leading management and market research firm, affectedthe projected growth of the Internet gaming industry. What was initially projectedto be a $6 billion industry worldwide in 2003 is now expected to be about a $4.1billion industry. In the meantime, some Internet casino operators now estimatethat four out of every five requests for credit card payment are being denied.

The Associations’ Transaction Coding Systems Can Be Compromised

Association officials stated that the effectiveness of efforts issuing banks make toblock transactions involving Internet gambling is dependent upon the integrity ofthe associations’ coding systems as implemented by merchants and acquiringmembers throughout the world. We were told, however, that the coding systemscan be compromised in two ways: (1) by Internet gambling merchants thatattempt to disguise their transactions by miscoding them, and (2) by cardholderswho attempt to circumvent the system by using on-line payment providers.11

Merchants May Disguise Transaction Codes

According to an association official, Internet gambling merchants, knowing thatproperly coding the transactions could result in a denial of authorization, have astrong incentive to try to disguise their transactions. Issuing bank officialsemphasized the difficulty of identifying attempts to conceal Internet gamblingtransactions, regardless of any proactive efforts to find such instances ofmiscoding. One official noted that some disguised Internet gambling transactionscan be identified only by chance, if at all. We were told that both associationsmonitor transactions for fraud, looking for and investigating significant changes inmerchant account activity and other patterns of suspicious activity. Thesemonitoring efforts, which may identify miscoded transactions from Internetgambling merchants, are designed to detect many different types of fraudulentschemes. Association officials also noted that consumer complaints and concernsraised by issuers have been helpful in identifying coding errors related to Internetgambling.

10

Charge-offs represent the losses incurred by issuing banks when outstanding credit card debtsare not paid.

11 On-line payment providers, such as PayPal, Inc. or SureFire send and receive fundselectronically for such uses as on-line auctions and purchases—and possibly Internet gambling.On-line payment providers are also referred to as payment aggregators by members of the creditcard industry.


In November 2001, one of the credit card associations implemented an Internetgambling audit program to help minimize the extent of coding errors related toInternet gambling. Rather than monitoring actual transactions, the programfocuses on monitoring Internet gambling Web sites to identify merchants that maybe disguising their credit card transactions. The association’s staff sampleInternet gambling Web sites and test the reliability of their coding efforts bysubmitting “dummy” transactions. When an Internet gambling merchant is citedfor using incorrect codes, the responsible acquiring bank can be fined $25,000 permerchant outlet. To date, the association has imposed more than $100,000 inpenalties on six acquiring banks for improper coding by merchants.

Using On-line Payment Providers Can Obscure Transaction Codes

Issuing banks also view as problematic cardholders’ use of on-line paymentproviders to pay for their Internet gambling activities. These entities enableconsumers to use their credit cards to set up accounts with many kinds ofInternet-based merchants, including on-line casinos. Because credit cardtransaction codes can be obscured as the transactions pass through suchintermediaries, issuing banks cannot determine whether credit card funds arebeing used for Internet gambling. Rather than developing an audit program toaddress Internet gambling issues, one association has chosen to focus attentionon dealing proactively with these on-line payment providers, which it views as apotential loophole in the system. An official explained that the association has apolicy of not doing business with on-line payment providers without anunderstanding with the provider’s acquirer that any funds obtained by theprovider through the association’s systems will not be used for Internet gamblingunless the transaction is properly coded. The official cited an example in whichsuch an understanding could not be reached and the provider stopped acceptingcards bearing the association’s brand rather than comply with the codingrequirements.

Officials of the other association noted that it is the on-line payment providers’responsibility to ensure that credit cards are not used to pay for Internet gamblingactivities, unless the funds transfer is explicitly coded as an Internet gamblingtransaction at the time of the authorization. This coding enables issuers that havedecided to block Internet gambling transactions to deny authorization for thosemade through an on-line payment provider. Officials were aware that at least onemajor on-line payment provider was regularly using the Internet gamblingtransaction codes when they were warranted.

Full-Service Companies Focus on Keeping Internet Gambling Sites fromBecoming Merchants

American Express and Discover have companywide policies that restrict the useof credit cards for Internet gambling, but officials stated that the restrictions applyto all gambling activities because the companies do not, as a matter of policy,want to do business with such high-risk industries. To address Internet gambling,


both credit card companies have developed specific procedures to help ensurethat Internet gambling sites do not become credit card merchants. First, Internetbusinesses applying to become merchants are screened, generally through routinevisits and reviews of the applicants’ Web sites, to verify that they accuratelyrepresent the business they are in and that they are not engaged in any gamblingactivities. Second, the companies seek to ensure that existing Internet credit cardmerchants do not discreetly transform into Internet gambling sites—somethingthat, according to officials, has been known to happen. To this end, one of thecredit card companies told us it has contracted with a third-party vendor to assistwith the implementation of an Internet monitoring system to identify improperuse of its card on the Internet. This initiative entails identifying and testingInternet gambling sites that attempt to secure payments using the company’scredit card, including existing merchants that may have expanded into Internetgambling activities. Company officials noted that the vendor has also identifiedseveral Internet gambling sites that were illegally using the company’s logo toprovide legitimacy to their Web sites. We were told that the other company usesits own employees, rather than an outside vendor, to conduct similar reviews ofInternet gambling sites in general and of the company’s existing Internetmerchants in particular.

In spite of these efforts, company officials recognize that some Internet gamblingsites that attempt to secure credit card payments may still go unidentified. Thus,as part of their overall efforts to monitor fraud, both companies have alsoimplemented procedures to monitor transactions for patterns that might indicateInternet gambling activity. However, like issuing bank officials, credit cardcompany officials acknowledged that identifying Internet gambling transactionsafter the fact is difficult. They also agreed that on-line payment providersrepresent a challenge to credit card companies that are trying to restrict the use oftheir cards for Internet gambling. Officials for both companies stated that theyhave reached an agreement with one major on-line provider stipulating that theprovider will block Internet transactions using technology the companies provideand are working on similar agreements with other on-line payment providers.According to recent news articles, the on-line payment provider that agreed toblock Internet gambling transactions has been purchased by an entity that is nowrequiring it to stop facilitating Internet gambling transactions altogether.

Views Differ on the Vulnerability of Internet Gambling to Money

Laundering

Representatives of law enforcement agencies, regulatory bodies, and the creditcard and gaming industries expressed mixed views regarding the vulnerability ofInternet gambling to money laundering. Law enforcement officials believe thatInternet gambling can be a significant vehicle for laundering criminal proceeds,specifically at the relatively obscure “layering” stage of money laundering.12 The

12 Money laundering can occur in three stages—the placement, layering, and integration stages. Inthe placement stage, funds generated from illicit activity are converted to monetary instruments or


officials cited several characteristics of Internet gambling that they believe makeit vulnerable to money laundering, including the volume, speed, and internationalreach of Internet transactions and the offshore locations of Internet gamblingsites. In their view, these characteristics can promote a high level of anonymityand give rise to difficult jurisdictional issues.

Law enforcement officials acknowledge the lack of adjudicated cases, butcontinue to believe that there are many potential ways of laundering moneythrough Internet gambling sites. The Financial Action Task Force, aninternational body aimed at combating money laundering,13 expressed concernssimilar to those of U.S. law enforcement agencies and identified Internet gamblingas an area requiring greater regulatory scrutiny on an international as well asnational level. Although specifics were not provided, a February 2001 task forcereport stated that some member jurisdictions had evidence that criminals wereusing Internet gambling to launder their illicit funds.14

Banking and gaming regulatory officials did not view Internet gambling as beingparticularly susceptible to money laundering, especially when credit cards, whichcreate a transaction record and are subject to relatively low transaction limits, areused for payment. Likewise, credit card and gaming industry officials did notbelieve Internet gambling posed any particular risks in terms of moneylaundering. As noted earlier, the credit card industry has other reasons forrestricting the use of credit cards in Internet gambling transactions. In general,gaming industry officials did not believe that Internet gambling was any more orless susceptible to money laundering than other electronic commerce businessesand noted that the financial industry—which is responsible for the paymentssystem—is better poised to monitor for related suspicious activity in the area. Afew officials did acknowledge that on-line casinos were basically an extension ofbrick-and-mortar casinos and should probably be subject to similar anti-moneylaundering requirements.

Industry gaming officials also cautioned that Internet gambling could becomemore susceptible to money laundering as U.S. financial institutions continue toblock the payment of Internet gambling activities through credit cards. Theyexplained that credit cards would likely be replaced by the promotion and use ofnewer forms of electronic payments that may not be subject to the same level of

deposited into financial institutions. In the layering stage, the funds are moved to otherinstitutions and accounts through various activities to obscure their origins. Finally, in theintegration stage the funds are used to acquire legitimate assets or fund further activities.

13 The Financial Action Task Force is considered the largest and most influentialintergovernmental body seeking to combat money laundering. Established in 1989, the task forcehas 31 members, including the United States. Its activities include monitoring members’ progressin implementing anti-money laundering measures, identifying current trends and techniques inmoney laundering, and promoting the adoption of the organization’s standards.

14 FATF—XII: Report on Money Laundering Typologies (2000-2001), February 2001.


record-keeping or transaction limits as credit cards are thus more susceptible tomoney laundering. In addition, officials pointed out the likelihood that someemerging electronic gambling schemes that make identifying gamblers andenforcing regulations more difficult would become more popular. Such schemescould include, for example, player-to-player wagering that allows individuals toplace bets directly with other bettors without the involvement of a bookmaker oroperator. According to gaming officials, the absence of the bookmaker oroperator who normally assigns the odds or monitors the betting action increasesthe potential for illegal activity, including money laundering, to occur.

-----

We will issue our final report in November 2002. We obtained technicalcomments on the legal and money laundering sections of a draft of this letter fromDOJ. Treasury reviewed the money laundering sections and had no technicalcomments. We are sending copies of this letter to the Chairman and RankingMinority Member of the Senate Committee on Banking, Housing, and UrbanAffairs and to the Ranking Minority Members of the House Subcommittee onFinancial Institutions and the House Subcommittee on Oversight andInvestigation, Committee on Financial Services. The letter will be available onGAO’s Internet home page at http://www.gao.gov.

Please contact Barbara Keller, Assistant Director, or me at (202) 512-8678 if you oryour staff have any questions concerning this work. Key contributors to this workinclude Evelyn Aquino, Emily Chalmers, Jason Holsclaw, Elizabeth Olivarez,Sindy Udell, and Darleen Wall.

Sincerely yours,

William O. Jenkins, Jr.Director, Financial Markets and Community Investment

http://www.gao.gov/

Enclosure I


Gambling Laws in Five States and Their Effect on Internet Gambling

This enclosure discusses the details of the gambling laws in the five states—Massachusetts, Nevada, New Jersey, New York, and Utah—that we judgmentallyselected to reflect the wide variations in state gambling laws.

Massachusetts: Illegal to Transmit Any Bet over the Telephone

Massachusetts does not have a statute specifically making it illegal to bet over theInternet, and there have been no court cases in Massachusetts that theMassachusetts Attorney General’s office is aware of that have applied the state’sgambling laws to Internet gaming. Massachusetts law makes it illegal to transmitany bet or wager over the telephone.15 Massachusetts also prohibits theestablishment of unauthorized lotteries, numbers games, and other games ofchance in the state.16 Under this statute, chance must predominate over skill inthe results of the game in order for gambling to have occurred.17 Further, it iscriminally punishable to be found in Massachusetts with any apparatus, books, ordevice for registering bets.18 Finally, Massachusetts outlaws gaming in a publicplace19 and running a gaming house.20 Massachusetts does allow some forms ofgambling to be run by the State Lottery, a division of the MassachusettsDepartment of the Treasury.21 The State Lottery is responsible for regulatingstatewide lotteries,22 scratch tickets,23 pull-tabs,24 beano,25 raffles by certainorganizations,26 and keno.27 The State Lottery requires every licensee of lotterygames to post a notice about compulsive gambling.28 Massachusetts also haslegalized dog and horse racing under the supervision of the state racingcommission.29

Nevada: Among the First States to Make Internet Gambling Illegal

In 1997, Nevada became one of the first states to make Internet gambling illegal.30

The Nevada statute provides that operators of on-line gambling sites who acceptwagers from gamblers located in Nevada are guilty of a misdemeanor.31 However,

15 Mass. Ann. Laws. ch. 271, §17A (2002).16 Mass. Ann. Laws. ch. 271, § 7 (2002).17 United States v. Marder, 48 F. 3d 564, (1st Cir. 1995), cert. denied, 514 U.S. 1056 (1995).18 Mass. Ann. Laws. Ch. 271, § 17 (2002).19 Mass. Ann. Laws. ch. 271, § 2 (2002).20 Mass. Ann. Laws. ch. 271, § 5 (2002).21 Mass. Ann. Laws. ch. 10, § 22-58 (2002) (“state lottery law”).22 Id.23 Id.24 Id.25 Mass. Ann. Laws. ch. 10, § 37 (2002).26 Mass. Ann. Laws. ch. 271, § 7A (2002).27 Mass. Ann. Laws. ch. 10, § 27A (2002).28 Mass. Ann. Laws. ch. 10, § 38A (2002)29 Mass. Ann. Laws ch. 6, § 48 (2002).30Nev. Rev. Stat. Ann. 465.091-465.094 (1997).31 Id.

Enclosure I


the statute creates an exception if the bet is transmitted to a licensed person orestablishment in Nevada and the wager “complies with all other applicable lawsand regulations concerning wagering.”32

In June 2001, Nevada enacted legislation allowing the Nevada GamingCommission to adopt regulations governing the licensing and operation ofInternet gambling.33 The statute allows the Gaming Commission to adopt rulesregulating Internet gambling only when the commission determines:

that interactive gaming can be operated in compliance with all applicable laws; that interactive gaming systems are secure and reliable; that the systems provide reasonable assurance that players will be of lawful

age and communicating only from jurisdictions where it is lawful to make suchcommunications; and

that such regulations are consistent with the public policy of the state to fosterthe stability and success of gaming.

Nevada sought the DOJ’s guidance on federal laws that may be applicable tointeractive gaming. In response, DOJ provided Nevada with a letter advising thatfederal law prohibits gambling over the Internet, including casino-style gaming. Inaddition, DOJ indicated that interactive gambling activities occur in both thejurisdiction where the bettor is located and the state or foreign country where thegambling business is located.

Nevada has declared that the state’s public policy is that “the gaming industry isvitally important to the economy of the state and the general welfare of theinhabitants.”34 However, all gaming establishments must be licensed to protectthe “public health, safety, morals, good order and general welfare of inhabitants ofthe state.”35 It is illegal for any person to operate any gambling game or gamingdevice without being licensed.36 Any game played for money or property triggersthe licensing requirement. There is an exemption for social gambling as long asno money is made in operating the game.

New Jersey: Internet Gambling Not Approved by Required Public Referendum

In New Jersey, only gambling that has been authorized by public referendum islegal, and Internet gambling has not been authorized by public referendum. TheNew Jersey constitution prohibits the legislature from authorizing gamblingunless the specific type of gambling, any restrictions on it, and control of it havebeen approved by public referendum.37 In addition, New Jersey’s criminal code 32 Nev. Rev. Stat. Ann. 465.094.33 Nev. Rev. Stat. 463.750.34 Nev. Rev. Stat. Ann. § 463.0129 (2002).35 Id. at 1(d).36 Nev. Rev. Stat. Ann. § 463.160 (2002).37 N.J. Const., Art. 4, Sec. VII, Para. 2. (”No gambling of any kind shall be authorized by theLegislature unless the specific kind, restrictions and control thereof have been heretofore

Enclosure I


prohibits the promoting of unauthorized gambling,38 and its civil code bans anyform of unauthorized gambling as well.39 As an unauthorized form of gambling,Internet gambling is prohibited under New Jersey law. However, the New Jerseylegislature has introduced legislation that would allow the Atlantic City casinos tooperate Internet casinos from their own floors so that bettors could wager on lineon real-time games being conducted at the casinos.40 However, an official fromthe New Jersey Attorney General’s office informed us that this legislation neverprogressed last term and has not been reintroduced. On March 18, 2002, a jointresolution was proposed in the New Jersey Assembly for the formation of anInternet Gaming Study Commission, which would consist of legislators, executivebranch officials, and members of the public with expertise or interest in gaming inthe state. The commission would conduct a comprehensive study of the social andeconomic impact of legalizing Internet gambling in New Jersey. An official fromthe New Jersey Attorney General’s office has informed us that this resolution hasnot yet passed.

In June 2001, New Jersey’s Attorney General filed three separate civil casesagainst entities operating Internet gambling web sites that accept wagers forcasino-style games, horse races, and sports games from individuals located inNew Jersey. These cases are still pending. However, we understand thatsettlement discussions are under way. In addition, in June 2002 New Jersey’sAttorney General settled two of seven civil lawsuits that it filed on October 16,2001, which sought to enjoin companies engaged in Internet gaming activitiesfrom accepting wagers on various professional and collegiate sporting eventsfrom individuals or entities located in New Jersey. In State v.www.intercasino.com, New Jersey entered into a settlement agreement withdefendants who agreed that any licensing or related agreements these companiesmay enter into in the future will contain a provision prohibiting licensees fromaccepting sports bets from persons located within New Jersey. In another actionalso filed on October 16, 2001, State v. www.intertops.com et al., defendantsagreed to implement and maintain good faith measures designed to preventindividuals operating computers in New Jersey from placing wagers on its site.

In New Jersey, land-based casino gaming was legalized for gambling in AtlanticCity in 1976 through voter referendum. The New Jersey Legislature establishedthe Casino Control Act, which provides for the regulation of the casino industry. 41

The responsibility for regulation rests with the Division of Gaming Enforcementand the Casino Control Commission. New Jersey has licensed racing under theNew Jersey Department of Law and Public Safety. Bingo and raffles are legalized

submitted to, and authorized by a majority of the votes cast by, the people at a special election orshall hereafter be submitted to, and authorized by a majority of the votes cast thereon by, thelegally qualified voters of the State voting at a general election, except that, without any suchsubmission or authorization.”).38 N.J. Code § 2C:37-2.39 N.J. Code § 2A:40-1.40 2002 New Jersey Assembly Bill No. 568.41 N.J. Stat. § 5:12-1 et. seq. (2001).

Enclosure I


for certain groups,42 as are amusement games.43 New Jersey allows a lottery runby the state.44 In addition, New Jersey has a Council on Compulsive Gambling toaddress compulsive gambling issues that arise out of the gambling that takesplace in the state.45

New York: State Courts Have Found Internet Gambling Illegal

Unauthorized betting and gambling are illegal in New York. With certainexceptions, New York has expressly prohibited betting in both its constitution46

and its General Obligations Law.47 In addition, New York’s General Obligation Lawrenders “void” all contracts based on those bets and New York’s Penal Lawprohibits the promotion of gambling.48 The New York Supreme Court hasinterpreted the state’s prohibition against unauthorized gambling and itspromotion as extending to Internet gambling. In People v. World InteractiveGaming Corp., 714 N.Y.S. 2d 844 (N.Y. Sup. Ct.1999), the court held that the NewYork Attorney General could enjoin an on-line gambling casino from offeringgambling to residents of New York State over the Internet. In addition, New York’sAttorney General recently initiated two separate inquiries into certain businesspractices of Citibank (South Dakota), N.A. and PayPal, Inc. regarding theirfacilitation of on-line gambling by New York citizens. These inquiries resulted in asettlement in which, among other things, PayPal agreed to stop processing anypayments involving PayPal’s New York members for on-line gambling merchants.Citibank agreed to block and decline authorization for bank card transactions thatwere coded and submitted to Citibank as on-line gambling transactions. Officialsfrom the Attorney General’s office told us that the potential claims againstCitibank and PayPal involved the provision of New York’s General Obligation Lawthat renders contracts based on illegal gambling void. Another legal theory wasbased on New York’s criminal facilitation law, which makes it illegal to promotegambling.49

New York has authorized certain types of gambling. New York has legalizedcertain lotteries operated by the state and certain types of pari-mutuel betting onhorse races, as well as bingo, lotto games, and local games of chance authorizedby vote of the electors in the jurisdiction where the activity is conducted. Inaddition, only bona fide religious, charitable, and nonprofit organizations mayoperate these games, and the net proceeds from the gambling must be exclusively

42 N.J. Stat. § 5: 8-1 - 8-77 (2001).43 N.J. Stat. § 5: 8-78 - 8-118 (2001).44 N.J. Stat. § 5: 9-1et. seq. (2001).45 N.J. Stat. § 5: 5-159 (2001).46 N.Y. Const. art. I, § 9.47 N.Y. Gen. Oblig. L. § 5-401 (“All wagers, bets or stakes, made to depend on any race, or upon anygaming by lot or chance, or upon any lot, chance, casualty, or unknown or contingent eventwhatever, shall be unlawful.”).48 N.Y. Penal Law § 225 et seq.49 NY Penal Code §§ 225.05 & 225.10.

Enclosure I


for the charitable organization.50 New York also allows licensed pari-mutuelcorporations to maintain telephone betting accounts for wagers placed on racesoffered by such corporations from both in-state and out-of-state residents.51 NewYork has created the New York State Racing and Wagering Board to regulate itslegalized gambling activities52 and has executed certain tribal-state compactsunder the Indian Gaming Regulatory Act of 1988.53

Utah: All Forms of Gambling Are Illegal

Internet gambling is prohibited in Utah, along with all other forms of gambling.54

Utah’s Assistant Attorney General has stated that using the Internet to gamble inUtah is illegal.55 Utah’s constitution provides that the Utah legislature “shall notauthorize any game of chance, lottery or gift enterprise for any pretense orpurpose.”56 Gambling is defined to include “risking anything of value for a returnor risking anything of value upon the outcome of a contest, game, gaming scheme,or gaming device when the return or outcome is based upon an element of chanceand is in accord with an agreement or understanding that someone will receivesomething of value in the event of a certain outcome, and gambling includes alottery.”57 The promotion of gambling and possession of gambling devices are alsoillegal.58 Utah does not have a state lottery.

50 N.Y. Const. art. I, § 9.; McKinney’s Exec. Law §§ 430-439-a (bingo) and McKinney's Gen. Mun.Law § 185 et seq. (local games of chance).51 McKinney’s Rac., Pari-Mut. Wag. & Breed.Law § 1012.52 McKinney’s Rac., Pari-Mut. Wag. & Breed.Law § 101.53 McKinney's Exec. Law § 12.54 Utah Code Ann. § 76-10-1102 (2001).55 Steven Oberbeck, “Gambling in Utah: Are Cybercasinos on a Roll?” Salt Lake Tribune (May 24,1998).56 UT Const. Art. VI, § 27 (2001).57 Utah Code Ann. § 76-10-1101 (1) (2001).58 Utah Code Ann. § 76-10-1104 & 1105 (2001).

Enclosure II


Other Federal Gambling Laws Applicable to Internet Gambling Activity

Three federal statutes appear to have direct applicability to online gambling: theWire Act, the Travel Act, and the Illegal Gambling Business Act. In addition, theIndian Gaming Regulatory Act (IGRA) establishes the regulatory framework forgambling on Native American reservations. To date, only the Wire Act has beenused in the federal prosecution of Internet gambling activity. The other federalgambling statutes have been used in the closely analogous situation of telephonewagering, including telephone calls to place wagers with offshore bookmakers.This enclosure discusses the applicability of the two remaining federal gamblingstatutes to Internet gambling.

In addition, this enclosure describes the IGRA, which recognizes the gaming rightsof Native Americans. Certain types of gaming on Indian reservations arepermitted under IGRA, and tribes have exclusive authority to regulate them. Buttribes must negotiate an agreement with the state or states where the reservationis located in order to conduct casino-style gambling. One court has examined theissue of whether Internet gambling involving a server located on an Indianreservation would be considered gambling on the reservation. If so, theprosecution of such gaming by the state would be preempted by IGRA.

Gambling over the Internet May Violate the Travel Act

The Travel Act provides criminal penalties for anyone who undertakes interstateor foreign commerce with the intent to distribute the proceeds of any unlawfulactivity.59 Under the Travel Act, unlawful activity includes any business enterpriseinvolving gambling in violation of the laws of the state in which the gamblingtakes place or of the United States. Thus, gambling over the Internet violates theTravel Act because an interstate facility, the Internet, is used to conduct gambling.For instance, in People v. World Interactive Gaming Corp, 714 N.Y. S. 2d 844 (N.Y.Sup. Ct. 1999), the court stated that gambling conducted over the Internet withbets placed in New York, where gambling is illegal, and received in Antigua,where gambling is legal, violates the Travel Act. In this case, the New YorkAttorney General brought an action to enjoin an Antiguan company from offeringgambling in New York over the Internet.

Similarly, in United States v. Kaczowski, 114 F. Supp. 2d 143, 153 (W.D. N.Y. 2000)the court found that defendants’ bookmaking in New York violated the Travel Actwhen they transmitted wagers made in the state by telephone to the West Indies.Additionally, in United States v. Smith, 209 F. Supp. 907, 916 (E.D. Ill. 1962) thecourt held that the Travel Act can be used to prosecute interstate gamblingconducted over the telephone wires because the wires transmit the data (thevoices of the gamblers) in the same manner that physical goods are moved acrossthe ground. The court found that the telephonic “voice packets” of gamblinginformation violated the Travel Act.

59 18 U.S.C. § 1952 (1994).

http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&DB=345&FindType=\ Y&ReferencePositionType=S&SerialNum=1962112757&ReferencePosition=916

Enclosure II


The Illegal Gambling Business Act Makes It a Crime to Operate an “IllegalGambling Business”

The Illegal Gambling Business Act60 makes it a crime to operate an “illegalgambling business,” which is defined as any gambling business that meets threeconditions:

it is in “violation of the law of a State . . . in which it is conducted,” it involves at least five people (not even the same five people) at all times

during a 30-day period, and it “has been or remains in substantially continuous operation for a period in

excess of thirty days or has a gross revenue of $2,000 in any single day.”

Operating a gambling Web site for over 30 days in a state under such conditionswould violate this act. A Web site could meet these conditions, including therequirement that at least five individuals be involved in its operation. These fivepeople do not need to be directly involved in the gambling but must only beconsidered “necessary and helpful” to the operation. Computer operators,computer maintenance crews, accountants, and owners could all be included as“necessary and helpful” in the operation of an Internet gambling Web site.

Like the Wire Act, the Illegal Gambling Business Act applies only to gamblingbusinesses, not individual gamblers. The Illegal Gambling Business Act does notrequire that the casino operators be convicted in state court,61 but the gamblingactivity must violate state law. The proof requirements associated with the IllegalGambling Business Act are minimal. The government must prove only that thebusiness met the three conditions.62 The 30-day requirement will be satisfied ifthere is a “repeated pattern of gambling activity.”63

The Indian Gaming Regulatory Act’s Application to Internet Gambling Is Unclear

Certain types of gaming on Indian reservations are permitted under the IndianGaming Regulatory Act,64 with the type of gambling determining the regulatoryjurisdiction. Tribes have exclusive authority to regulate social games andtraditional tribal gambling. With federal oversight, tribes also have authority toregulate bingo and nonbanking card games. However, tribes wishing to conductcasino-style gambling must successfully negotiate an agreement with the state orstates where the gambling will be conducted. The resulting “Tribal-StateCompact” will govern the specifics of the tribal casino.

60 18 U.S.C. § 1955 (1994).61 United States v. Murray, 928 F.2d 1242, 1245 (1st Cir. 1991).62

United States v. DiMuro, 540 F.2d 503, 508 (1st Cir. 1976), cert. denied, 429 U.S. 1038 (1977).

63 United States v. Nerone, 563 F.2d 836, 843 (7thCir. 1977); United States v. Allen, 588 F.2d 1100,1104 (5th Cir. 1979), cert. denied, 441 U.S. 964 (1979).64 Pub. L. 100-497, 102 Stat. 2467 (1988) (Found at 27 U.S.C. § 2701, et. seq.).

Enclosure II


Issues regarding state and federal authority over gambling on Indian reservationswere addressed in a 1987 Supreme Court decision.65 In California v. CabazonBand of Mission Indians, the Supreme Court upheld the right of tribes assovereign nations to conduct gaming on Indian lands. The Court limited the rightsof states to regulate gaming on Indian lands if gaming is permitted for any otherpurpose. As a result of this Supreme Court ruling, Congress in 1988 passed IGRA,which recognizes Native American gaming rights and provides for a statutoryscheme of state regulation of gaming on Indian lands.66

IGRA divides gaming into three classes. Class I gaming, which is regulatedexclusively by the tribes, includes traditional forms of Indian gaming played inconnection with tribal ceremonies.67 Betting on horse racing at a tribe’s annualpowwow qualifies as traditional gaming. Class II gaming includes bingo, pull-tabs,and nonbanking card games authorized or not explicitly prohibited by state law.States have no role in the regulation of Class II gaming occurring on Indian lands.Class III gaming includes all forms of gaming that are not Class I or Class II. Thiscategory includes casino games, slot machines, and pari-mutuel wagering. ClassIII gaming may be conducted by an Indian tribe only if the state in which the tribeis located permits such gambling for any purpose by any person, organization, orentity; if the tribe and the state have negotiated a tribal-state compact that hasbeen approved by the Secretary of the Interior and the compact permits suchgambling; and the governing body of the tribe has adopted a gaming ordinancethat has been approved by the National Indian Gaming Commission.

A recent case addressed some of the issues concerning Internet Gambling andraised the question of whether Internet gambling takes place on tribal lands whenbettors use their home computers to access Internet lotteries via computerservers. State of Missouri v. Coeur D’Alene68 involved the question of whether thestate of Missouri could prevent a Native American tribe in Idaho from acceptingmoney from Missouri residents via a lottery Internet site. The tribe removed thecase from Missouri state to federal court, where the complaint was dismissedbecause the cause of action was preempted by IGRA. When the case reacheddistrict court, the state asked to have it moved back to state court, alleging thatthe activities of the U.S. Lottery in Missouri were not on Indian lands and that thedistrict court did not have jurisdiction because state, not federal, law determinedthe legality of the activity. The district court denied the request and dismissed thecase on the grounds of the tribe’s sovereign immunity. The Eighth Circuit Courtof Appeals reversed the district court’s denial of the motion, asserting that thedistrict court was first required to determine whether the gaming at issueoccurred on Indian lands, in which case the denial was appropriate, or off Indian

65 California v. Cabazon Band of Mission Indians, 480 U.S. 202 (1987).66 Gary C. Anders, Indian Gaming: Financial and Regulatory Issues, 556 Annals Am. Acad. Pol. &Soc. Sci. 98, 99 (1998) (citation omitted).

67 25 U.S.C. §§ 2703 (6), 2710.68 164 F. 3d 1102 (8th Cir), cert. denied, 527 U.S. 1039 (1999).

Enclosure II


lands, in which case the denial was not appropriate. Once at district court, thestate again moved to return the case to state court. On September 21, 1999, thedistrict court granted the state’s motion. It is unclear whether the issue of wherethe gambling occurred was resolved. However, the issue of where Internetgambling takes place has been addressed in United States v. Cohen, 260 F.3d 6892d Cir. (2001), which held that the transmission of bets and wagers from NewYork to a foreign country where such betting was legal violated both the laws ofthe United States and of the state of New York, where the bettor was located.

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Documents

United States General Accounting Office Washington, DC 20548